In this final leg of The Checklist tour we'll be looking at the Dynamic Allocation step and touch briefly on ex-post Performance Analysis.
Essentially this involves repeating the previous 9-steps on a periodic basis (e.g. a sequence of monthly allocations) according to a chosen allocation policy.
Examples of dynamic allocations include systematic strategies (based on signals) and portfolio insurance.
Those interested in active portfolio management and who attend the ARPM bootcamp, will also have access to the ARPM Lab. In it are 2 very interesting chapters covering both the theory and practice (with code) of quant strategies, where you'll learn among other things, how to construct a characteristic portfolio (Grinold and Easton) based on your signals. For an example of such a characteristic portfolio strategy, see the youtube video on slide #56 Dynamic Allocation (video).
In our toy example with the goal of constructing a low volatility equity portfolio, our chosen allocation policy will be to weight the 30 DJIA stocks according to the ex-ante minimum variance portfolio, and rebalance the portfolio at the end of each month.
We'll use an expanding historical data window of at least 3 years, apply time-conditioned weights to the observations when estimating the ex-ante distribution, and also use a simple form of shrinkage before optimizing.
To simulate such a sequence of allocations over a 3 year period, we'll use the open source Zipline package.